Shareholders may need to lose anonymity if market reform is to work
As the new managing director of the Canadian Coalition for Good Governance (CCGG), Stephen Griggs is building upon the organization’s strong reputation for instilling good corporate governance among Canadian companies. His experience as a corporate commercial and securities lawyer and continued involvement in the investment management business, most recently as president and CEO of Legg Mason Canada, informs his nuanced approaches to compensation, proxy voting and the proposal for a single regulator. And thanks to his predecessor David Beatty’s great work with the organization since it was founded in 2002, issuers are in prime position to receive new guidance.
Paul Schneider, director of research at the CCGG, says ‘corporate governance improves dramatically each year,’ citing the release of compensation disclosure policies which have helped companies significantly. ‘The final result came out pretty close to where we wanted them to go,’ he adds, excepting individual metrics, which he says CCGG members hoped would be ‘much more precise than what we’ve seen.’
Are you worth it?
As in the US, pay-for-performance is a frequent subject of debate among Canadian institutional shareholders. It’s a key complaint for CCGG members, who Schneider says ‘are waiting for the Canadian securities administrators to put out the rules about what they should be doing,’ and these are expected to be released by the end of the year. Griggs agrees there is a strong focus among members ‘to make sure long-term compensation is based upon actual corporate performance, particularly tied to success for shareholders.’
This doesn’t mean it’s time to mandate a shareholder vote on pay. Bill Mackenzie, director of special projects at the CCGG, says companies ‘deserve more time’ to develop disclosure. Many companies are already bettering practices, he says, and he is seeing more independence of consultants and increased expertise on compensation committees. Should there be vague disclosure in the next proxy season, however, Mackenzie adds, ‘maybe we will step in behind and say, Okay enough’s enough, let’s get our say in on this on a case-by-case basis.’
Majority voting, on the other hand, is an issue the group isn’t backing down on. Though majority voting among issuers has risen, Mackenzie admits, ‘There’s still a lot of resistance to the idea of putting a director to the majority test.’ Majority voting is ‘a key part of our thinking around mandatory say on pay votes,’ adds Griggs. ‘[In some cases] our members may feel it appropriate to vote against the compensation committee as a way to send a very strong message to [the board] as opposed to a non-binding, really meaningless vote on compensation. A non-binding resolution can have minimal impact. Our preference is to have conversations with companies when we feel that there are issues rather than having a very public fight with the board.’
These private conversations help the CCGG generate best practices. Currently redrafting compensation best practices, the organization is stressing anew that compensation be performance-based. It is also calling for more simplification in disclosures. ‘It’s very hard for a shareholder to understand what is motivating and driving the executives,’ says Griggs. ‘These difficulties aside, we feel the board should be trying to simplify their compensation structures to provide clearer messages to their executives and to their investors as to what they are trying to achieve.’ With disclosure being so complex, ‘it’s hard to see how [say on pay] could be meaningful except in a really egregious situation.’
The group is confronting a more novel issue: symmetry in pay. ‘Having the ability to make lots of money if things go well is great but you also have to have the realization that you’re not going to make lots of money if things don’t go well,’ Griggs points out. There’s little evidence that companies are really grasping this concept, he adds, noting that, in fact, just the opposite is true: ‘Executives at companies that underperform their peers still get very well compensated.’
Identifying the shareholder
Just as compensation is a key issue in both Canada and the US, so is proxy voting. Taking hints from its most like-minded counterpart, the US, Canada is also looking at global strategies. Denmark, says Mackenzie, is interesting because ‘they’ve put a lot more information into the hands of the clearing house,’ while Australia has done away with OBO, or the secrecy of ownership. ‘If we really want to clean it up,’ he posits, ‘maybe we’ll have to suck it up as institutional investors and allow ourselves to be identified to the issuer.’
To properly fix the proxy voting system in Canada, Mackenzie stresses the necessity to ‘understand the whole system’ from regulatory requirements to how it works in Canada and abroad. To do so requires having conversations with everyone involved, ‘from custodians to transfer agents to Broadridge.’ In discussing ongoing issues with proxy solicitors and institutional investors, Mackenzie says, the CCGG has mapped out the system and they are trying to understand technical details like stock lending.
One for all
All of these issues pale in comparison to the elephant in the room: the proposal for a single regulator. The hope is that a single regulator could better combat white collar crime, and quell the sense of urgency regarding Canada’s poor record for penalizing offenders. Right now, Schneider notes, ‘There’s the optic out there that Canada’s like the wild west and you can do anything you want and nothing’s going to happen to you.’
Griggs has brought a new approach to the issue, suggesting a split between regulation, dealing with things like securities filings, and enforcement, concerning corporate crime. ‘[In Canada] you don’t have a guy like Eliot Spitzer making his career beating up company executives,’ Griggs explains. ‘The investigation of white collar crime has not been the high priority of governments here in Canada.’
Investigating white collar crime is complex. As such, Griggs advocates ‘that the federal government
set up a new investigatory agency which would be staffed by a multidisciplinary team … to focus exclusively on crimes in the capital markets.’ Though there’s been no progress on this issue among regulators, the CCGG has made a submission to a federal government panel set up to advise the minister of finance primarily on the national regulator issue.
At present, Canada has a passport system for securities filings that can be accepted across provinces. Smaller provinces, due to lesser capability, are more likely to embrace the system. Ontario is the only province that is excluded, ‘meaning the filing has to be done in two jurisdictions to be cleared across Canada,’ explains Mackenzie.
Keeping it real
The CCGG has proved efficacious in sprucing up corporate governance in Canada, evidenced by the increasingly strong performance among public companies. A recent Rotman School of Management report, which measured characteristics like board independence and chair-CEO separation, shows corporate governance has never been stronger among issuers.
Through increased private engagement with companies, the CCGG hopes to solidify its stand on important upcoming issues. And since the CCGG considers ‘regulations to be minimum standards,’ we’re likely to get even more sound advice as regulators become more involved in the expanding sphere of corporate governance.
